The Impact of SFAS 133 on Income Smoothing by Banks through Loan Loss Provisions

We examine the impact of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, on the reporting behavior of commercial banks and the informativeness of their financial statements. We argue that, because mandatory recognition of hedge ineffectiveness under SFAS 133 reduced banks...

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Bibliographic Details
Published in:The Accounting review 2013-01, Vol.88 (1), p.233-260
Main Authors: Kilic, Emre, Lobo, Gerald J., Ranasinghe, Tharindra, Sivaramakrishnan, K.
Format: Article
Language:English
Subjects:
Accounting interpretations
Accounting standards
Accounting theory
Bank assets
Bank loans
Banking industry
Banking regulation
Banks
Commercial banks
Derivatives
Experimental methods
Financial accounting
Financial management
Financial services
Hedging
Loan loss allowances
Loan losses
Loans
Studies
Tax writeoffs
U.S.A
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Summary:We examine the impact of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, on the reporting behavior of commercial banks and the informativeness of their financial statements. We argue that, because mandatory recognition of hedge ineffectiveness under SFAS 133 reduced banks' ability to smooth income through derivatives, banks that are more affected by SFAS 133 rely more on loan loss provisions to smooth income. We find evidence consistent with this argument. We also find that the increased reliance on loan loss provisions for smoothing income has impaired the informativeness of loan loss provisions for future loan defaults and bank stock returns.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-50264